Primary Residence Exemption

More on s 7C of the Income Tax Act

Effective as from 1 March 2017, s 7C of the Income Tax Act subjects to an annual donations tax an interest-free or low-interest loan to a resident trust (167, 168 TSH 2017; see also the Monthly Notebook in this issue). An exemption is provided by s 7C(5)(d), in circumstances in which the loan is applied by the trustees for purposes of funding the acquisition of a ‘primary residence’.

Would a soft loan applied to improve a primary residence, for example, by way of alterations, qualify for the s 7C(5)(d) exemption? And what about the acquisition of land to build a primary residence?

Acquisition v improvements
On a strict, literal interpretation, the wording of s 7C(5)(d) is clear, in that it refers to ‘funding the acquisition’, implying a limitation on post-acquisition improvements, with the result that loans funding such improvements would not qualify for the exemption. In fact, I agree with Costa Divaris when he says that a direct, causal link is required between the ‘funding’ and the ‘acquisition’:

The relevant Explanatory Memorandum provides no further guidance, since it merely states that: ‘A loan made by or at the instance of a natural person to a trust will be excluded to the extent to which that loan was used by that trust to fund the acquisition of a residence that is used by that person or that person’s spouse as a primary residence.’

As for the inevitable numerical cross-reference by s 7C(5)(d), to para (b) of the definition of ‘primary residence’ in para 44 of the Eighth Schedule to the act, this adds no elucidation to the meaning of the exemption.

Nor does the juxtaposition of this exemption with the other exemptions listed in s 7C(5) offer any clues about the intention behind the exemption, other than the obvious intention to exempt ‘acquisition funding’. Each exemption is clearly a ‘stand-alone’.

In my view, a pre-occupation loan also does not qualify for the exemption, since s 7(5)(d)(i) requires that the lender or spouse use the asset (primary residence) ‘as a primary residence…throughout that year of assessment’. It follows that the purchase of land on which a primary residence is to be built will not qualify for the exemption until the year that the building is completed and occupied, for a full year of assessment, by the lender or spouse.

Postscript
Having regard to a purposive approach, rather than a strict literal interpretation, Costa and I cannot discern any distinction between the acquisition and the improvement of a primary residence, since the two are often closely associated in practice. So it might make sense to lobby for an appropriate extension of the exemption, in a future amendment to legislation, to include the funding of improvements.